Accounting and Its Environment

Develop an accounting vocabulary for decision making. Accounting is a system for measuring, processing, and communicating financial information. As the “language

of business,” accounting helps a wide range of decision makers. Accounting dates backs to ancient civilizations, but its importance to society has been greatest since the Industrial revolution.

Apply accounting concepts and principles to analyze business transactions. The three basic forms of business organization are the proprietorship, the partnership, and the corporation. Whatever the form, accountants use the entity concept to keep the business’s records separate from the personal records of the people who run it. Accountants at all levels must be ethical to serve their intended purpose. Generally accepted accounting principles (GAAP) guide accountants in their work. Among these guidelines are the entity concept, the reliability principle, the cost principle, the going-concern concept, and the stablemonetary-unit concept.

Use the accounting equation to describe an organization’s financial position. In

its most common form, the accounting equation is Assets=Liabilities + Owner’s Equity.

Use the accounting equation to analyze business transactions. Transactions affects a business’s assets, liabilities, and owner’s equity. Therefore, transactions are

analyzed in terms of their effect on the accounting equation.

Prepare the financial statements. The financial statements communicate information for decision making by the entity’s managers, owners, and creditors and by government agencies. The income statement presents a video of the entity’s operations in terms

of revenues earned and expenses incurred during a specific period. Total revenues minus total expenses equal net income. Net income or net loss answers the question, How much income did the entity earn, or How much loss did it incur during the period? The statement of owner’s equity reports the changes in owner’s equity during the

period. The balance sheet provides a photograph of the entity’s financial standing

in terms of its assets, liabilities, and owner’s equity at a specific time. It answers

the question, What is the entity’s financial position? The statement of cash flows

reports the cash coming in and the cash going out during the period. It answers, Where did cash come from , and, Where did it go?

Evaluate the performance of a business. High net income indicates success in business; net loss indicates a bad year.